Buy-sell agreements can minimize business disruption due to divorce
If you operate a business with one or more other partners, and one of you goes through a divorce, there’s a real risk this could impact how the business operates going forward. That’s because your share in the business, which presumably became valuable through your hard work, could be divided in a divorce
In “community property” states, where assets acquired during marriage are split down the middle, this means the spouse of a divorcing co-owner could walk away with a substantial interest in the business and a substantial say in running its affairs. In “equitable distribution” states, where a divorcing couple’s assets and liabilities are divided up based on what the court deems fair under the circumstances, a co-owner’s spouse could conceivably walk away with an even bigger share. That’s why it’s a good idea for any small business to have a “buy-sell” agreement: a binding contract between co-owners of a business that sets rules about when an owner can sell their interest, who can buy an owner’s interest, and the price that should be paid.
In terms of divorce, a buy-sell agreement could require the ex-spouse of a newly divorced co-owner to sell any interest he or she received in the divorce back to the company or to its other owners.
Alternatively, if the spouse of an owner receives an interest in the business during a divorce, a buy-sell agreement can automatically convert that interest to a non-voting interest. Or it can give the other owners the right of first refusal to buy the spouse’s newly received interest if he or she decides to sell it.
If you’re the one who ends up getting divorced, a buy-sell agreement won’t necessarily prevent your soon-to-be ex from taking a good chunk of your own financial stake in the company or taking a bigger portion of other assets instead. But at least your partners would be protected, and your soon-to-be ex wouldn’t have a say in management decisions, which could help minimize business disruptions going forward.
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